If you are going to be replacing your hot water heater, consider not replacing it. Instead, get a tankless hot water heater in it's place.

Tankless hot water heaters are not big like "normal" hot water heaters because they do not store hot water. They supply hot water on demand, only when it is needed. As a result, you save energy since you are keeping a large container of water hot 24/7. In addition, you never run out of hot water since the water is heated only as needed. Need to have 10 people take a shower in a row? No problem for a tankless hot water heater.

The one downside is the initial cost. As you might guess, they are more expensive than conventional hot water heaters, tending to run $300 - $500 more. But there is a federal tax credit for them, so if you itemize your taxes, you can recoup a couple hundred dollars of the cost. In addition, since you are saving energy, you will also be saving money. In the not-so-long-term, the cost difference will be made up and you'll end up saving money in the long run.